Private ownership is regaining ground across Europe as firms seek greater control and relief from the pressures of public markets. However, before delisting, managers often adjust reported earnings, sometimes to make the corporate appear cheaper or to pave the way in which for a takeover. But once these plans change into public, markets often react positively, viewing the move as a signal of future value.
This shift toward privatization began after the tech bubble burst within the early 2000s and accelerated after the 2008 financial crisis as firms sought greater control and adaptability outside of public markets. The expansion of personal equity firms has reinforced this trend and opened up recent opportunities to restructure and lift capital away from the general public eye. In Europe, where ownership is usually concentrated, voluntary delistings through leveraged buyouts (LBOs), management buyouts (MBOs) or minority exits have change into common.
Earnings management before exit
As voluntary delistings change into more common in Europe, attention is popping to the way in which managers handle returns ahead of those transactions. Accounting standards equivalent to IFRS and US GAAP allow for a certain degree of discretion and provides managers the pliability to influence reported results through accounting decisions or actual business decisions.
This flexibility could make an organization’s performance appear higher or worse than it actually is and influences decisions and contracts that rely on financial reports. If these measures comply with accounting standards and reflect real business activity, they aren’t fraudulent and might function a company restructuring tool.
Before voluntary delistings, managers often manage earnings downwards. With LBOs, a discount in reported earnings may also help lower the takeover price, while with MBOs a more favorable takeover price may be achieved for the managers themselves. In each cases, earnings management acts as a strategic tool that helps make delistings more cost effective and smooth.
So the important thing questions are whether managers in Europe cut profits ahead of voluntary delistings and whether markets recognize this before or across the announcement.
Insights and market reactions
My study examines 526 European firms – half of which were voluntarily delisted and the opposite half remained listed – using accounting and market data from 2005 to 2023. Abnormal current accruals were estimated using the DeFond and Park (2001) model to measure earnings management. In an event study using stock prices, cumulative abnormal returns (CARs) were measured before and around each announcement date. T-tests and odd least squares regressions were then conducted to check the hypotheses.
The results show clear patterns in firms’ behavior before delisting announcements:
- Companies manage their profits downward by utilizing negative abnormal current provisions within the 12 months before voluntary delisting via LBOs and MBOs. This pattern suggests that managers could also be intentionally reporting lower earnings to support a lower transaction price.
- These firms experience positive cumulative abnormal returns across the delisting announcement date, indicating positive market reactions to the voluntary delisting decision. For European firms that voluntarily delist via LBOs and MBOs, downward earnings management within the 12 months before delistings is influenced by the voluntary delisting decisions in addition to by the ROA ratio, the businesses’ D/E ratio, age to delisting, sales growth, MTB ratio and delisting years. In practice, stakeholders should consider the influence of those aspects on financial reporting practices to make more informed strategic decisions.
Although overall consistent with previous research, this study didn’t find significant downward movements in stock prices prior to the announcements.
Implications for investors and policy makers
The results suggest several practical implications. Stakeholders should consider how voluntary delisting decisions will impact financial reporting practices prematurely of announcements in an effort to make more informed strategic decisions and higher assess the reliability of economic reports.
While the earnings management observed here is just not illegal, whether through accounting options permitted under IFRS or through adjustments to actual operations, it nonetheless reflects opportunistic management behavior by firms preparing to delist.
Regulators will want to strengthen disclosure standards to make sure that financial reports more accurately reflect firms’ performance before delisting. Financial analysts and advisors can incorporate the earnings management impact of delisting decisions into their assessments and client recommendations.
Most previous studies on earnings management prior to voluntary delistings give attention to the United States and the United Kingdom. By examining European firms, this research expands the geographical scope of the literature and increases the relevance of earnings management insights. The evaluation integrates perspectives from accounting, corporate finance, governance and law to offer a more comprehensive view of earnings management.
Taken together, the outcomes highlight how management decisions influence financial reporting and market reactions to voluntary delistings in Europe, providing each a broader understanding of earnings management and practical insights for investors and regulators
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